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Want to Know How to Survive in a Down Economy? Then Look in Your Warehouse!

Written By: Guest Blogger

Published: August 19 2009

When I speak with distribution executives nowadays, they all say the same thing: “We are struggling to keep our heads above water because of the economy.” However, before the economy took a turn for the worse, they talked about low profit margins, high inventory levels with low turns, and an erosion of their profitability because of their warehouses. I am often forced to ask, “Is the economy really that bad? Or, is your inability to deliver what your customers want, when they want it, and at a competitive price making it seem worse to your organization?”

Your organization is currently under a microscope. Every order you deliver to your customers is magnified 1,000 times. When there is a mistake, you wonder if they will order from you again. Your sales people are working harder than they have probably ever had to work for orders. But they are not competing against other sales people. Your warehouse is competing against other warehouses. So, if you really want to know how to survive in “any” economy, all you have to do is look in your warehouse.

Your warehouse, like every other warehouse, is comprised of two main elements: people and inventory! Most distribution organizations do a horrible job at managing both of these fundamentals.

To prove it, here’s an example. The value of your inventory ranges between 6 and 20 percent of your top-line sales. That means a company with 100 million dollars in sales will generally have between 6 and 20 million dollars of inventory on hand. Let me ask you this question: When was the last time your warehouse supervisor took a course on managing inventory?

Assuming you are generating a 4 percent return, that would mean for every $100 of lost inventory, your hard-working sales staff must generate $2,500 in new sales to make up for the $100 of inventory your warehouse lost. If your warehouse was to lose $100 a week (equating to $5,200 a year), your sales staff would have to generate $130,000 to make up for the $5,200 of inventory the warehouse lost. I guarantee your warehouse loses more than $5,200 of inventory a year—which means a good portion of your sales staff’s effort goes straight to purchasing to make up for your warehouse’s inability to accurately control your inventory! This is a simple example that proves most distributors do a horrible job at managing their inventory.

Scott Hess, a principal with Redhawk Advisors, a mergers and acquisitions firm, had this to say: “In the due diligence phase of an acquisition, the inventory is often overstated and usually reassessed at a much lower value, due to antiquated accounting statements on the balance sheets.”

Your customer service personnel spend a portion of their day performing warehouse tasks. They often place a customer on hold—walking by two warehouse personnel talking instead of working—so they can verify that the inventory in the bin matches the quantity displayed on the screen. Your outside sales personnel often have to pick their own orders because your counter is so busy. And the inventory in the trunks of their cars is probably more accurate than the inventory in your warehouse.

Your picking and put-away personnel spend a good portion of their day—55 to 60 percent of their time—traveling to and from your locations. And when the product is not there for the pickers or the location is full during put-away, which happens quite frequently, they spend approximately an hour a day searching for it in other locations. I have another question for you: When was the last time your warehouse supervisor took a course on how to slot and profile your product?

Because most companies are in “dumbsizing” mode, it appears the staff is more productive. We even see that national numbers are stating productivity is on the rise. However, you have product from vendors that does not get received for days. Therefore, your purchasing department spends its time reviewing proof of deliveries from your vendors. You have returns, which take a backseat to every other process in your warehouse; and for distributors between 3 to 8 percent of your orders are returned. And on average, a customer will call four times to inquire about a return. Again, because it takes so long to process, while the cost of handling a return can be two to three times that of an outbound shipment. When was the last time your warehouse supervisor took a course on improving productivity and reducing picking errors?

Right now you have someone controlling 20 percent of your revenue and hiring and firing key personnel, and they have probably never taken a course, attended a seminar, or read a book on inventory control, or how to efficiently lay out your warehouse or improve employee productivity. I have to ask, “Is the economy really that bad? Or, is your inability to deliver what your customers want, when they want it, and at a competitive price making it worse for your organization?”

Your warehouse was a problem prior to the economy’s taking a turn for the worse. Your warehouse was a problem prior to the housing slowdown. Your warehouse was a problem and you have known about the problems your warehouse creates for some time now—but you have chosen to ignore them. So I say, “Don’t blame the economy for the problems your organization is experiencing right now, blame your warehouse!” By addressing your warehouse problems, your organization will be able to survive in any economy. But if you continue to overlook them, this economy will consume your organization along with the many others it has already devoured.

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Rene’ Jones is widely known in the supply chain and logistics industry as the founder of Total Logistics Solutions, Inc. (www.logisticsociety.com). TLS is a warehouse efficiency company which was recently named “One of the top 100 Supply Chain and Logistics Providers in the world.” Rene’ is a sought-after keynote speaker who has been published, referenced, and quoted in industry magazines throughout the United States, Central America, Canada, Australia, and Europe. He is the author of several books, including the critically acclaimed “This Place Sucks (What your warehouse employees think about your company and how to change their perceptions!).” Rene’ has more than 18 years of experience in consulting, training, warehousing, and logistics. He has used his industry knowledge to assist small and large multinational organizations alike, making them more efficient, more profitable, and more prepared.